Download MARKET EQUILIBRIUM PRICE NOTES

Bryant
Economics
MARKET EQUILIBRIUM PRICE NOTES
Determining Prices in a Free Market System
Assuming that competition exists, prices are determined in a __________ ___________
through the interaction of _____________ (those who are willing and able to purchase goods)
and ______________ (those who are willing and able to produce goods or make them available
for sale).
This means that without government intervention, the “______________ _______” of the
marketplace coordinates the quantities that consumers are willing able to purchase (________)
and that producers are willing and able to provide for sale (___________) at various price at a
particular point in time.
When the market matches up the two sides (_______ and _______) of the market, a
________ ______ is determined. The market price is the price at which all that is
__________ is _________.
Equilibrium in the Marketplace
P
S
3
2
D
1
5
10
15
Q
The Pe = ______ Qe = _______
At the market price what is the relationship of
QS_____QD
Because this relationship exists, the market is said
to be in ___________ at the market price.
Therefore, the market price is also called the
_________________ price (Pe) and the quantity at
the market price is called the ________________
quantity or Qe. The market price and quantity price
(Pe and Qe) are found only at the
_________________ of the supply and demand
curves.
Disequilibrium in the Marketplace
P
If the seller or sellers decide to raise the price of
the good above the market price (Pe) from $2 to $3,
then
___ P above Pe ___QD ____QS ____S ____D
S
3
2
At the new higher price:
QD ____ QS
D
1
5
10
15
Q
Therefore, _________________
1
The market is in disequilibrium (out of balance) because a ___________ exists. When this
occurs, sellers will ___P, then QD ___ and QS____ until QD___QS. Because of the law of
__________ and __________, the market always seeks equilibrium. In this case P will ___
until Pe is reached. QS___QD= the size or amount of the _________ = ____.
P
If the seller or sellers decide to lower the price of
the good above the market price (Pe) from $2 to $1,
then
P ___ Pe ___QD ____QS ____S ____D
S
3
2
At the new lower price: QD ____ QS
Therefore, _________________. The market is in
disequilibrium (out of balance) because a
___________ exists. When this occurs, sellers will
D
1
5
10
15
Q
___ P and then QD ___ and QS___ until QD __ QS. Because of the law of _________ and
_________, the market always seeks equilibrium. In this case P will ___ until ___ is reached.
QD __ QS= size or amount of the __________ = ___.
How the market price is changed
If a seller raises or lowers his/her price above or below the market price equilibrium (Pe), the
result will be a ___________ or ___________. This is because the change in price simply
causes movement along the demand and supply curves. The movement changes only the ____
and the _____, thus causing QD and QS to no longer be in balance.
For the market price to change, there must be a new intersection of supply and demand; thus,
the market price changes only if there has been a change in _______ or ________ resulting
from a change in _____________ _________________. Such changes will cause ________
in the supply and demand curves, resulting in a new intersection and therefore, a new __ and __.
Effects of changes in supply and demand on the market price
Increase in demand
Decrease in demand
P
___ D ___Pe ____ Qe
Increase in supply
P
___ D ___Pe ____ Qe
P
Q
___ S ___Pe ____ Qe
Decrease in Supply
P
Q
___ S ___Pe ____ Qe
Q
Q
Government interventions in the market place
Sometimes government intervenes in the operation of the ______ ________ because demands
have been made on the government to do something about prices that are “_____ ______” or
“______ ______.” The government takes action in these instances to place legal barriers on
the market place that will not allow ______ to fall below certain price or to _____ above a
certain price. These legal barriers are identified and defined below:
_______________ a legal minimum price below which the price of a good is not allowed to fall.
_______________ a legal maximum price above which the price of a good is not allowed to rise
To be effective, a minimum price must be
placed ______ the equilibrium price. Such a
minimum price will create a ____________.
To be effective, a maximum price must be
placed _____ the equilibrium price. Such a
maximum price will create a ____________.
Effect of a price floor/support:
P
Effect of a price ceiling:
P
Q
Q